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Proposed regulations under section 163(j), business interest limitation

Section 163(j), business interest limitation

The U.S. Treasury Department and IRS today released proposed regulations as guidance under the business interest limitation provisions of section 163(j)—a measure enacted as part of the new U.S. tax law.

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Read text of the proposed regulations [PDF 1.5 MB] (439 pages)

A statement on this version of the proposed regulations provides that these have been submitted to the Federal Register for publication and are currently pending placement and publication in the Federal Register. "The version of the proposed rule released today may vary slightly from the published document if minor editorial changes are made during the [Federal Register] review process. The document published in the Federal Register will be the official document."

 

The purpose of this report is to provide text of the regulations. Initial impressions on these proposed regulations will be provided in a future edition of TaxNewsFlash

Related IRS release

The new U.S. tax law amended section 163(j) to disallow a deduction for net business interest expense of any taxpayer in excess of 30% of a business’s adjusted taxable income plus floor plan financing interest. The legislative history indicates that the section 163(j) limitation is to be applied after other interest disallowance, deferral, capitalization or other limitation provisions. Thus, the provision would apply to interest, the deduction for which has been deferred to a later tax year under some other provision.

A related IRS release (IR-2018-233) explains that a provision under the new U.S. tax law limits the business interest expense deduction for certain taxpayers. Certain small businesses with gross receipts of $25 million or less and certain trades or businesses are not subject to the limits under this provision. 

  • For tax years beginning after 2017, the deduction for business interest expense is generally limited to the sum of a taxpayer’s business interest income, 30% of adjusted taxable income and floor plan financing interest. 
  • Taxpayers will use new Form 8990, Limitation on Business Interest Expense Under Section 163(j), to calculate and report their deduction and the amount of disallowed business interest expense to carry forward to the next tax year. This limit does not apply to taxpayers whose average annual gross receipts are $25 million or less for the three prior tax years. This amount will be adjusted annually for inflation starting in 2019. 
  • Other exclusions from the limit are certain trades or businesses, including performing services as an employee, electing real property trades or businesses, electing farming businesses and certain regulated public utilities. 
  • Taxpayers must elect to exempt a real property trade or business or a farming business from this limit. 

Taxpayers may rely on the rules in these proposed regulations until final regulations are published in the Federal Register. Written or electronic comments and requests for a public hearing on these proposed regulations must be received within 60 days of publication in the Federal Register.

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